--Leases be issued for commercial development activity in these areas in an open, competitive bid basis in a manner similar to Outer Continental Shelf oil and gas leases.

--Payments stemming from lease arrangements be put in
an escrow account pending final international agree-
ment as to how financial benefits from deep sea mineral
development should be distributed.

--Exploration or commercial developmental action must
take place within a specified time period or suffer
forfeiture of lease rights.

S. 2053 provides for a licensing rather than a revenuesharing leasing system. We note that Section 204 does provide for the reservation of a portion of the revenues derived from ocean mining for future contribution to such international authority as may be established over deep seabed resources. However, actual implementation of such an escrow account is left to the passage of further, additional legislation. We believe that in the absence of any demonstrated, near-term domestic need for development of new sources of materials likely to be supplied through deep ocean mining; and given the importance of the revenue sharing principle; legislation should not be enacted which leaves the issue of escrow account payments open to later, indefinite resolution.

GAO does not support Section 202 of S. 2053, which would provide up to $350 million to each licensee for losses which might be suffered as the result of subsequent international agreements, following Law of the Sea negotiations, being ratified by the United States. If U.S. private interests willingly undertake, under Federal license, exploration and commercial recovery with knowledge that the United States is currently negotiating an international agreement, we do not believe it is necessary for the U.S. government to be responsible for compensating the private interests for the financial consequences of implementing the international agreement known to have been under development.

In summary, we believe that S. 2053, which addresses only investment-oriented questions, should be deferred pending

--resolution of other institutional problems identified in the GAO report accompanying this letter;

--careful alignment between deep ocean mining and
general foreign policy objectives;

--formulation of a revenue-sharing leasing system similar
to that which has been adopted for Outer Continental
Shelf oil and gas resources;

--development of specific provisions for operation of
a revenue-sharing escrow account.

GAO opposes enactment of S. 2053 in its present form.

Sincerely yours,

Temes A. Steels

Comptroller General
of the United States

Enclosures

2

Reference is made to your request for our comments on H.R. 3350, 95th Congress, which, if enacted, would be cited as the "Deep Seabed Hard Minerals Act"; and H.R. 3652, which, if enacted, would be cited as the "Ocean Mining Incentive Act of 1977".

The purposes of H.R. 3350 are to (1) establish an interim licensing program to encourage and regulate the recovery and processing of hard mineral resources of the deep seabed, pending the adoption of a superseding international agreement, relating to such activities, which is ratified by and becomes binding upon the United States; and (2) insure that the development of hard mineral resources on the deep seabed is carried out in an environmentally safe manner which will protect the quality of the marine environment in any area effected by such development. The general purpose of H.R. 3652 is complementary to that of H.R. 3350. It would provide incentives for development of mineral-bearing nodules from the deep seabed by making available Federal insurance to safeguard investments.

As a general matter, we believe that the provisions of both bills should be closely coordinated with and be part of the overall strategy of U.S. initiatives and policy objectives under the Conference on the Law of the Sea. Similarly, we believe they should be considered in the framework of a coherent deep sea mining development program which establishes the appropriate Federal role and clearly assigns responsibility for carrying it out. This framework has not yet been established.

For example, a basic issue which has not yet been addressed is what share of the revenues which would derive from deep sea mining operations should accrue to the public. Under H.R. 3350 a first-come, first-served licensing system would be established under which the

developing firms would retain all financial benefits of deep sea mining. We believe there is a strong public interest in deep seabed resources and that a licensing system which would provide for only private financial benefit is inappropriate. For this reason, we strongly encourage instead, examination and adoption of an exploration and leasing system which, in a manner similar to the existing system for Outer Continental oil and gas resources would provide for payments to the Government for these public resources.

Such a system should provide that:

--exploration and actual commercial development
are explicitly distinguished.

--permits to explore the deep ocean area be issued.
These permits should be issued to any potential bona
fide bidder who wants to explore. In order to avoid
unnecessary duplication of exploration, any bona
fide potential bidder should be able to "buy in"
on the exploration information by paying a pro-rata
share of the cost of exploration.

--information obtained under exploration permits
must be shared with the Government. Such information
should help the Federal Government estimate the
fair market value of the resource to be leased.

--following the exploration phase there be a call
for nominations of areas to be leased. In addition,
the Government should have the option of offering
tracts that it feels are potentially valuable even
if no nominations are received on those tracts.

--leases be issued for commercial development activity
in these areas in an open, competitive bid basis
in a manner similar to Outer Continental Shelf
oil and gas leases.

--payments stemming from lease arrangements be put
in an escrow account pending final international
agreement as to how financial benefits from deep
sea mineral development should be distributed.

--exploration or commercial developmental action
must take place within a specified time period or
suffer forfeiture of lease rights.

As presently structured, both H.R. 3350 and H.R. 3652 would have the effect of encouraging initiatives by U.S. mining interests. As a consequence, they could serve to induce activities which could ultimately be inconsistent with overall U.S. foreign policy objectives. At conferences on deep sea bed areas not clearly under the control of any country, the U.S. has recognized the effect mining of these areas would have on existing mineral supply systems and the revenues earned by certain countries through established systems. Given these circumstances and absent any demonstrated, near-term domestic need for development of new sources of such materials likely to be supplied through deep ocean mining, we have reservations about establishing any incentives program at this time.

Should the Congress choose to establish a system for licensing deep ocean minerals exploration and mining by U.S. firms prior to finalization of an international agreement, we also have reservations about providing Government compensation to firms for loss of continuity of operations or investment as a result of an international agreement being ratified. If U.S. private interests willingly undertake, under Federal license, exploration and commercial recovery with knowledge that the United States is concurrently negotiating an international agreement, we do not believe it is necessary for the U.S. Government to be responsible for compensating the private interests for the financial consequences of implementing the international agreement known to have been under development.

If the Congress determines that establishment of an incentives program is desirable, then we believe the form reflected in H.R. 3652 is preferable. Under its provisions, eligible mining firms would pay an annual premium in an amount related to the relative investment risks involved. The premiums would go into a fund along with appropriated funds to cover the expense of any compensatory claims. In contrast, under H.R. 3350, an applicant for license simply tenders, on a one-time basis, a prescribed fee. Such fees are deposited into a fund to be used for administration and other costs incurred in the processing of license applications. Presumably any compensatory claims which might be filed under the provisions of